Election Day

~ Jim Berger ~ 1 Comment

Your vote today supports theft, tyranny, and disaster.

When you cast your vote today, think about what you have really done. You have really abdicated your responsibility for your life, liberty, and happiness, in favor of authorizing theft, tyranny, and disaster. You probably feel like you’ve done the responsible thing. Your friends, family, the Hollywood elite, and the news media, all tell you so. But you need to use language that accurately describes the economic result of a vote in what people erroneously refer to as a democracy.

When political power overruns an economic system, voters should describe it in language that accurately describes what voters have done.

Theft

Voters have been led to believe that they do the right thing for our citizens when they vote for a system that offers healthcare, Social Security, welfare, and infrastructure. These all seem like things from which citizens can benefit. This may be true, but voters need to consider what they give up for these benefits.

Government “spending” creates a mis-allocation of precious resources. Government does not bear the cost of its “spending,” as do individual consumers. It engages in theft, which we refer to as taxation, in order to redistribute other people’s resources.

Would you steal from your neighbor in order to pay for something you want? Then why authorize politicians to steal in your name — even for a good cause?

Tyranny

Most of us want to improve public safety, assure that citizens deal with each other fairly, protect public health, and protect the environment. But, do political means implement the best processes to achieve these objectives?

What we refer to as “regulations” really amount to tyranny and oppression. Voters engage the monopoly force of government to restrict the behavior of other people. They violate the rights of citizens by restricting their use of their own property.

Disaster

Most citizens desire a healthy and growing economy — one that supports sufficient jobs and income for people to live comfortably. They have grown to believe that rising prices are a sign of a healthy and growing economy. If the banking system must expand the money supply to accomplish this objective, voters do not object.

Economists and politicians refer to monetary expansion as a form of economic stimulus. Monetary expansion, however, disrupts the market’s healthy pricing mechanism. The misinformation created causes artificial booms, which invariably lead to economic disaster. Along the way many of the rich get richer — but not in a healthy way. They don’t make more money by providing more and better products for consumers, they do so in trading with the artificially expanded money supply.

Conclusion

Whatever your political philosophy, voting supports the economics of oppression. It legitimizes the system in which the monopoly power of government intervenes in the normally efficient operation of markets.

  • Government engages in theft in order to redistribute resources according to the preferences of politicians.
  • Government engages in tyranny by influencing people’s behavior through the threat of violent force.
  • Government sets up the economy for future disaster through artificial stimulation resulting from the expansion of the money supply.

Election day provides an opportunity for you to consider the negative influences of the political means on your economic well-being. The words theft, tyranny, and disaster evoke a different emotional response than the terms spending, regulation, and stimulus. But, shouldn’t voters use words that more accurately describe for what they’re vote.

Take the opportunity to learn why markets unfettered by violent intervention—Free Markets—will always provide more effective and efficient allocation of resources.

Free markets bear a similarity to life — difficult; but rewarding.

 

Nations Cannot Win or Lose Trade Wars

~ Jim Berger ~ Leave a comment

Nation-states have no resources of their own. They redistribute the resources of their citizens. Nation-states can neither win nor lose when they play with other people’s resources. Tariffs and other weapons of trade wars disrupt normal trade; helping one group at the expense of another.

Illusion of Trade Deficits

The concept of trade wars begins with the illusion of trade deficits. When looking at the economy as a whole, trade deficits simply cannot exist. An economy, as a single unit, does not exist. An economy consists as a network of individual transactions. Thus, any comments about “an economy” require that we look at the nature of those individual transactions.

When a consumer acquires any good or service, by voluntary means, he always gives something in exchange — something he values less than what he gets. Thus, because the parties to an exchange leave with more value than they enter, no deficit can exist in any individual transaction. To make an hypothetical accumulation of all consumer transactions in an economic system the same logic must apply.

Buyers will always give money for the products they buy, whether from a local supplier or from a supplier in another country. Consequently, no deficit exists.

What Happens to the Money?

If a buyer always pays money for goods that he receives from overseas, what happens to that money?

One of three different things can happen to that money:

  • That money pays for products from the country of origin. Those purchases count as exports from the country of origin and thereby reduce the trade “deficit.”
  • That money acquires investments in the country of origin. Those investments, although not included in the GDP, have future benefit for that country.
  • That money buys government debt, which provides money for government giveaways. Those giveaways add to consumption and thereby the GDP. Not a bad thing from the policy-makers’ perspective.

How Do Tariffs Help Nation States Win War?

Only nation-states engage in “trade wars.” Peaceful traders have no incentive to engage in unhealthy activities.

The people involved in actual exchange do so voluntarily and peacefully. If they don’t like the terms of the exchange, they either renegotiate or abandon the transaction.

Since nation-states have no resources of their own, their actions — either through trade restrictions or tariffs — simply redistribute the resources of their own citizens. Nation-states have no weapons of their own for the conduct of trade wars; thus, they have no way of either winning or losing.

Trade Wars Cause Economic Disruption

The trade wars between nation-states disrupt the economies that they profess to help. In an effort to assist one part of the economy they always cause disruptions in other parts of the economy. The policies used in “trade wars” ignore the complexity of the markets with which they deal. For every player their policies help, multiple parties get hurt.

A couple of diagrams will give a very simple idea of the disruption caused by trade wars using tariffs.

Before Tariffs

This first diagram shows the situation before the implementation of tariffs. The consumer buys good G from supplier F (a foreign supplier) instead of buying the same good from supplier A (an American supplier) because it costs less money.

With the money the consumer saves he can buy products from other suppliers. The money earned by those other suppliers can, in turn, buy additional goods from an undetermined number of other suppliers (depicted by the cloud at the bottom).

The consumer gets more benefit and part of that benefit gets passed on to the rest of the economy.

After Tariffs

After the imposition of a tariff, which makes the price of good G from supplier F higher than the price from supplier A, the consumer will have to pay a higher price for the same product. This causes a chain reaction of negative results.

The consumer no longer has the extra money saved. He reduces his spending with other suppliers. The revenue of these other suppliers declines, and they spend less money with their suppliers. An indeterminate number of people in the economy get hurt as a result of the imposition of tariffs.

Please keep in mind the extreme complexity of international trade. A small intervention at one point in the trade process will have effects that ripple throughout the national economy and the international economy. We have no way of measuring the effect of these interventions. Because they always cause a disruption the normal trade process, these interventions will always have negative consequences.

Conclusion

Nation-states can gain only one thing by engaging in trade wars: political power. Some politicians think they are doing good things for their constituents by engaging in trade restrictions and tariffs. They base the activities of “trade war” on the false premise that trade deficits actually exist and they must be cured.

International markets, just like to domestic markets, are entirely too complex to be effectively managed. Messing with otherwise free markets only causes damage to the participants. In particular, it causes damage to those the politicians have sworn to protect.

 

Economics of Invasion

~ Jim Berger ~ 1 Comment

More people added to the population of the country adds nothing to its economy, unless they bring capital. Invaders generally don’t bring capital, they consume it.

Television screens have been filled with images of a large group of people marching across Mexico with the stated intent of seeking asylum in the United States. Many of those people — in fact most of them — state that they will enter the United States by one means or the other. This does, in fact, make them invaders. No other word describes this group of people accurately.

Some people argue that the term invader seems a little harsh for people attempting to get into this country. For that reason, a good working definition would help.

Invaders consist of people who enter another person’s property to take stuff — by force, if necessary.

In addition to objecting to the use of the term invader, some people claim that these people coming to the United States will provide a net economic benefit. I want to question that premise.

Current Economic Drag

It seems that throughout our economy people have the mistaken assumption that increases in population actually add to a healthy economy. More people, in fact, do not strengthen an economy; they weaken it. Only the addition of capital contributes to economic growth and prosperity.

When people move to a new area their presence involves capital consumption. They consume resources that others could use to build businesses. Only when they move to areas that have idle capital do they have any possibility of making a net contribution. The existence of idle capital presumes no workers available in that particular area.

In addition to consuming capital, new residents in a country have a depressing effect on local employment — particularly where minimum wage laws exist. Because minimum wage laws actually reduce the number of low-paying jobs available, these new residents will frequently displace citizen workers.

Myth of Future Contributions

In addition to overestimating the current value of additional residence, people also tend to greatly overestimate the current value of the future contributions of invaders. Even though many migrants to this country have started successful businesses, it takes many years to realize that potential. That future potential has limited value in the present.

Whatever present value future potential may have, it becomes highly diluted by the great majority of unskilled workers who will remain unskilled in the future.

Betting on the probability that large groups of immigrants contain a few individuals with huge future potential makes as much sense as attempting to make a living by buying lottery tickets.

Violent Intervention

No one, including myself, has claimed that these people have any intention of mounting an armed invasion. The means at their disposal consist of using our own violent intervention against us. They will use the resources of the United States the steal the property of American citizens via the violent intervention of our tax system. Our own government confiscates the property of our citizens to pay for the resources used by these people after they cross the border.

Some people claim they have a beneficial effect because they are net tax payers. That assertion is at best subject to question and at worst factually inaccurate. Consider that roughly 50 percent of our own population does not pay income tax. What percentage of these new people will have incomes that require them to pay taxes?

When we include the repatriation of American dollars to the countries that these people left, it becomes even harder to argue that people who cross the border illegally actually make a positive contribution to our economy.

Conclusion

The political and economic plight of the many people attempting to come to the United States does not negate their intent for invasion. They plan — whether knowingly or not — to use the power of the federal government to “steal” the property of American citizens. They do not have the capability, with the resources they bring, to make a positive contribution to the United States economy.

The economic arguments in favor of invaders simply provides weak cover for the political motives of those who encourage them.

The Power of Preference

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Preference has tremendous power because it guides all transactions in a market economy. The preferences of individuals govern all economic activity. You have power because of your preferences. Choose them with care.

For the most part we take our preferences for granted. After all, they are ours and ours alone. We get to choose whether we like yellow or blue. We get to choose whether we like hamburgers or fish sandwiches. And we get to choose whether we like iPads or Androids. But, those preferences don’t seem to affect anyone else.

Your preferences, however, play a vitally important role in your life and the lives of others. In your life those preferences determine what you wear, what you eat, where you live, and whom you choose to have as friends. When you go to the grocery store it matters to you whether you prefer oranges or bananas. It matters to you whether you buy raisin cookies or just raisins. How you act based on your preferences, of course, makes a difference in your life. But, what difference does it make in the lives of other people?

You don’t share preferences with other people. Your preferences belong to you only. You may have preferences similar to others, but you have chosen them for yourself. So again, what difference do your preferences make to other people?

Would you find it difficult to believe that market systems developed based on the preferences of many many individuals. The preferences of individuals represent the sole source for what we refer to as economic value. The preferences of individuals — or their subjective value — provide the basis for the value of anything bought, sold, or exchanged in a market economy.

Thus, the next time you or someone else makes a statement about the value or worth of the good offered for sale on the market, ask “In whose opinion?” Nothing has any economic value unless someone else prefers it to either what they have or what they have an opportunity to acquire.

Preferences have tremendous power. All economic activity occurs because of people acting on their preferences. In this blog, I will return frequently to the importance of preferences for two reasons:

First, because of its importance in effecting every economic activity; and
Second, because the truth of subjective value turns most economic models on their heads.

A Pricing Model

~ Jim Berger ~ Leave a comment

No one can build a model to either determine or predict prices, despite the useful information that prices provide. Attempts to predict prices will always prove fruitless.

Knowing prices in advance would prove useful to owners and managers in all businesses. Imagine the profitability a company that could accurately predict the future prices of its products. I will show that the best that we can do is interpret price patterns in order to make subjective judgments about market opportunities.

I will step through three different levels of models and explain their relative usefulness:[1]

  • Events
  • Patterns of Behavior
  • Market Structure

Events

Models to Determine Prices

Despite what they teach in basic economic classes a person cannot predict individual prices by finding the intersection of supply and demand curves. If you think about this for about 12 seconds, you will realize that no one has ever seen a supply or a demand curve. Economists draw these curves, after the fact, in an attempt to explain the behavior of buyers and sellers.

The fact remains that buyers act based on their scale of preferences and sellers must make reasoned guesses about what buyers might pay for their products. Business schools teach managers to make sophisticated models to develop offering prices based on their cost structure. That exercise, however, provides no guarantee that buyers will pay that price.

Patterns of Behavior

Models to Interpret Prices

Over a period of time patterns develop that indicate the prices upon which buyers and sellers agree. These patterns do not provide any prediction, but, based on the assumption that the past is an indication of the future, these patterns do provide some useful information.

Rising Prices

A pattern of rising prices provides significant useful information for entrepreneurs. A pattern of rising prices indicates relative shortages in a particular market and the possibility for profitable opportunity. If buyers willingly pay more and more for a good, it indicates that they have relative difficulty in finding that good. Entrepreneurs can exploit that opportunity. (See diagram below.)

Rising Prices

Declining Prices

Declining prices, on the other hand, indicate relative excesses in a specific market. Depending on the steepness of the decline entrepreneurs might decide to reallocate their capital to more profitable opportunities. (See diagram below.)

Declining Prices

Market Structure

Pricing Causal Loops

An accurate model of the market structure would provide the most accurate prediction of market prices. In the diagram below, I have sketched a conceptual model of a simple market structure. Briefly it would operate in the following sequence:

  1. Increases in production lead to increased inventory.
  2. Increased inventory leads to a reduction in production. These two steps create a balancing process. Additional reinforcing processes influence these two steps.
  3. Increased efficiency leads to reduced prices and increased production.
  4. Reduced prices lead to increased sales
  5. Increased sales reduce inventory leading to increased production.

If a modeler knew all these variables, he could accurately predict the behavior of the system.

Causal Loop

This model, however, has one fatal flaw. It represents a human system in which people act based on subjective judgments. As described in the section above no one can predict individual prices. We don’t know until after the fact what buyers will voluntarily pay for the goods in question.

When attempting to build models of markets, modelers make the mistake of assuming the patterns of behavior represent the mental models of buyers. (I.e. they confuse the map for the territory.) Prior to 2008 house prices rose consistently year after year for several decades. Market watchers mistakenly assumed that that trend would go on “forever.”

The preferences of individuals can shift suddenly, changing the structure of the market, creating entirely new patterns of behavior. No one can predict when these shifts in preferences will occur. No one can know when prices will change.

Conclusion

No reliable model for pricing can exist. Patterns of behavior provide the most useful models for interpreting market behavior. Rising prices generally signal shortages. Falling prices generally signal abundance. But, market participants must view these patterns with great caution.

In a free-market, buyers can shift their preferences relatively swiftly. But, in markets subject to intervention outside forces work to distort those preference scales, causing price distortions, misinformation, and the misallocation of resources.

  1. I base my statements on an assumption of no intervention in the market. I assume, for the sake of discussion, that fiscal redistribution, regulation, and monetary policy have no influence on market pricing. ↑

What’s It Worth?

~ Jim Berger ~ 1 Comment

The worth—or value—of any good is always unknown and unknowable. Use the consideration of this reality to trigger useful questions regarding market behavior.

If you have followed my posts to this point, you realize this question—”What’s It Worth?”—has only one answer: “The worth—or value—of any good is always unknown and unknowable.” Even an individual cannot quantify the worth of things he values. So, should this question always become a conversation ender?

No. Frequently pondering questions to which we have no answers plays as important a role in understanding as does having a ready answer. I will examine reflections on this unanswerable question at three levels:

  • Individual
  • Enterprise
  • Economy

Individual

When you pose the question” What’s it worth?” to an individual, what do you really mean? Since he cannot answer the question as phrased, you probably want to know what price he would pay for the item. What would he give up that he values less (usually in terms of money) to gain the item in question, which he values more? The answer always depends on his personal assessment. It may not work for you; but that does not make the answer wrong or right.

Enterprise

At the enterprise level the” What’s it worth?” question, again, generally refers to price—not value. In this case the” asking price” of an item usually results from a price discovery process in which a number of individuals, through individual acts of buying or not buying, signal how much they will voluntarily give up in order to acquire the item.

The price discovery process does not amount to a collective decision. Nor does it mean that the individual buyers have reached a consensus on a precise price for the item. It means that the asking price falls within a range in which the buyers willingly give up something—usually money—they value less than the item they buy.

Economy

The “What’s it worth?” question becomes a bit more complex when speaking of an economy. People use the Gross Domestic Product (GDP) as a common metric for the “value” of an economy. But does GDP provide any real indicator of value or even a measure of price? No.

It cannot indicate value because the diverse value judgments of millions of people regarding millions of items cannot represent a measure at any level.

GDP cannot provide useful information regarding prices. The varied prices of multiple goods simply cannot be aggregated. Just try to add the prices of hamburgers, autos, and cameras. You can’t do it.

So, is GDP a useless statistic? No. But, you must understand what it does measure. It simply measures the number of dollars exchanged for defined categories of goods. (GDP also suffers from logical flaws, which I will discuss in another post.)

Conclusion

Next time someone asks you,” What’s it worth?” stop and think. What does this question really mean? (You may not want to take the questioner through all your thought processes, but, the pause might clarify your own reasoning.)

Individually does this really refer to price?

For an enterprise, what range of value does the discovered price indicate? Can prices move up or down within a range within that range?

In an economy does the” value” metric provide useful information? Or, does it provide misinformation?

Consider the value of an unanswerable question.

The Importance of the Individual

~ Jim Berger ~ Leave a comment

The discrete nature of humans makes the individual the center of all market activity. They decide what has value and how much. Their actions based on those evaluations make free markets operate effectively and efficiently.

The subjective theory of value reveals that the individual plays the most important role in the development of all economic theory. The effective and efficient allocation of resources throughout an economy always depends on satisfying the needs and wants of individuals.

I will mention briefly some of the reasons why individuals are so important to understanding free markets:

Discrete Nature

Like all things in nature people will always remain separate. Individuals simply cannot form collectives. Communities of all sorts consist of networks of individuals. They have separate minds and the act separately. The subjective theory of value remains consistent with this fact.

Market Power

Because individuals provide the source and measure of value they also represent the predominant market power. All market transactions result from the actions of individuals. When organizations act, they do so as a result of the consensus of individual decisions.

The idea of individuals as a source of market power turns most economic theory absolutely on its head. Market power comes from the bottom of the hierarchy; not the top.

Inverted Cost Structure

The fundamental role of individuals inverts the popular model of market cost structure. The amounts that buyers willingly pay for goods and services determine the costs of retailers, distributors, and manufacturers, not the other way around. Goods cost what they do at every level of the production structure because of the demands of consumers for other products requiring the same resources.

When attempting to determine the cost of any good or service don’t look to the source of the resources used. Look to what buyers willingly give up to receive that good or service.

Determination of Market Prices

The bidding of individuals to purchase goods determine market prices. The competition between suppliers does not play the dominant role in holding down market prices. The bidding of individuals for goods actually stimulates competition between suppliers.

Determination of Wealth Distribution

Many people misunderstand the determination of the distribution of wealth. A good only has market value when individuals willingly offer something in exchange. The same holds true of the market value of resources. They only have value if they produce something for which individuals willingly exchange.

This fact holds true of the market value of financial assets. The ownership of a particular stock signifies wealth only because others desire to own that stock. Without legitimate demand — demand backed by substance — the stock becomes worthless.

Political Power

Like market power, individuals determine the source and level of political power. An individual gains political power when others delegate that person to exercise illegal or unauthorized force against another individual — or individuals. This does not change the original source of power i.e. the individual.

The role of the individual in the distribution of political power becomes important with a discussion of market intervention. I have previously defined free markets as those free of violent intervention—markets free of political power.

Conclusion

No process exists that eliminates the role of the individual in the operation of markets. Individuals determine what they value and how much they value it. No other source exists. As a result, the individuals reside at the center of the operation of any market.

I have only touched briefly on some of the aspects that make the individual so important to the development of economic theory. I will allude to the importance of the individual many times in the course of my blog posts.

Relationship of Value to Price

~ Jim Berger ~ Leave a comment
Value and price have a very close and important relationship. Value exists entirely in the subjective realm, whereas price provides objective evidence of an economic transaction. The price results from action taken based on value. It does not, as many people believe, provide a measure of value.

Value

As I have laid out in previous posts, value only exists as a subjective inference in the minds of individuals. It has no objective unit of measure — indeed the individual cannot quantify his own measure of value. An individual exposes his value preference only when he makes an exchange. When the individual makes an exchange he exposes his relative value to himself and anyone witnessing the transaction.

Exchange

When an individual encounters a good (A) that he values more than a good (B) that he owns he will seek to make an exchange. If the owner of good B values good A more than good B, these two individuals will make an exchange. The consummation of this transaction provides the proof that each party values what he gets more than what he gives up. If they don’t make the exchange, the original premise about who values what proves false. In other words, an exchange amounts to individual actions based on individual values. The result of that transaction provides objective evidence of the relative values of the two individuals. Keep in mind it only indicates relative values — in terms of more or less — and never quantifiable values. That evidence of value results in what we refer to as a price.

Price

The word price refers to the ratio of what a person gives up to what he receives. In other words, if Bill exchanges eight apples for four peaches, we can say the Bill’s per peach price equals two apples. A price only appears with the consummation of an exchange. If the owner of the peaches offers them at a ratio of three apples per peach, that does not amount to a price. It only amounts to an offer — or, if you will, an offer price. An exchange must occur in order to create a price. I realize that these examples seem almost ridiculously simple and somewhat unrealistic. Most transactions occur with the use of money and the price stated in terms of dollars and cents. Keep in mind that money simply exists as another good used as a medium of indirect exchange. The interpretation of “price” remains the same whether the transaction consists of a direct exchange — as in the case of Bill and his apples — or an indirect exchange — as with the use of money.

Interpretation

The price resulting from an exchange creates an objective indicator of the relative values for Bill and his exchange partner. After the exchange we can say with certainty that Bill values peaches more than apples. But, we still cannot quantify how much more Bill values peaches. Objective price information provides the basis for the development of effective and efficient allocation of resources throughout a market. When a price pattern develops in the market that indicates the existence of many buyers willing to trade apples for peaches at roughly the same ratio (price), peach producers who want apples know that a market exists for their produce. Money prices contain precisely the same information, however it can apply to a multitude of products exchanged indirectly. This information provides the foundation for economic calculation fundamentally important to the operation of free markets.

Conclusion

Knowing that people value goods on a individual subjective preference scale provides the basis for a sound fundamental theory of free exchange. It does not, however, provide us with any useful objective information. For useful information we must have the ratio of goods exchanged—which we refer to as price. By aggregating price data we can develop definitive statements about the relative values of the players in a particular market. We now know, with certainty, who values one good over another. Keep in mind that price does not measure value; it simply indicates the range of relative value. The price does, however, provide sufficient information for the effective and efficient allocation of resources in an economy.

Value Measure-Review

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Because I will frequently return to the subject of value, and its measure, over the course of these blog posts I have decided to publish the text of the same article I posted May 16, 2016 (with some edits).

If individuals provide the only sources of value, how do those individuals measure value? Does every person have a standard unit of value to compare the economic value of one good to another?

In fact, value has no unit of measure. Unlike height, weight, volume, etc., people have no way to compare their values with those of other people — or, indeed, with the goods they value themselves. Value has no objective source; and value has no objective measure. Only the subjective preference scales of individuals provide a measure of economic value. An individual can only value one economic good more or less than another economic good. A person cannot quantify how much more, or less, he or she the values that good.

Example

Preferences
Hypothetical Preferences

A hypothetical example (see right) might prove useful. This list shows the preferences (listing the most preferred at the top) of one individual for some fruits in a selection at a specific time and place.

The order of these preferences might change in a different time or place. Also, this person cannot tell how much they prefer the peach to the pear.

Important Factors

I will touch briefly on several important factors about preference scales—like this example.

First, preference scales only exist in an instant. A person can prefer ice cream to cantaloupe in one moment and cantaloupe to ice cream in the next.

Second, the unit of measure (e.g. quantity, volume, length) of a good affects its place on the preference scale. A person might place a bowl of ice cream high and their preference scale but a gallon of ice cream relatively low.

Third, distance affects preferences. Goods nearby have more value than goods in the distance.

Fourth, time likewise affects preferences. A good in the present has more value than the same good in the future.

Fifth, each additional unit has less value than the previous unit — all at the same time and place in the same units. The second bowl of ice cream has less value than the first. The 100th bowl of ice cream has less value than the 99th, the second, and the first. Not after eaten, but in the moment when the individual decides to buy them.

Sixth, context — weather, hunger, social situations, etc. — has an effect on relative value. A cold man might place more value on an ugly coat than a warm man, who might prefer a more fashionable coat.

Other factors can affect value scales, but these are some important ones.

Summary

  • Individual preference scales provide the only measure of value.
  • Those preference scales have no units of measure; only ordinal ranking.
  • Preferences exist only at a point in time.
  • Many factors affect preference scales including space, time, units, and context.

In the next post I will address the relationship between value and price.

Value Source – Review

~ Jim Berger ~ Leave a comment

On May 11, 2016 I posted an article describing the source of economic value. I revisit that subject because of its vital importance to economic reasoning.

In this post I will respond to some questions which have arisen since I posted that article more than two years ago. I’m sure that these questions are not all-inclusive. Thus, I will address the source of value when it becomes pertinent to other topics on this blog.

Validation of Source

How do we know that individuals are the only source of value?

Of all the sources that have been proposed for economic value, only the individual as the sole source holds up to logical scrutiny. Every other source, whether it be intrinsic value, labor input, or production cost, require some modification when looked at in detail. The only element consistently involved in the determination of value consists of individual people.

Economic goods seem to have different values under different circumstances and different uses. This fact negates the validity of any intrinsic value.

The production of nearly identical economic goods can require vastly different degrees of labor in terms of time and quality. Thus, no consistency exists in the labor theory of value.

Different producers of nearly identical economic goods can have significantly different cost structures. The cost of production theory of value also fails logical tests.

On the other hand, the existence of value always involves individuals.

Use or Exchange

Is there a difference between use value and exchange value?

Some theorists have attempted to distinguish between “use value” and “exchange value.” From the standpoint of source these distinctions make no difference. From the standpoint of the individual “exchange” consists of just another form of use. This provides yet another consistency in advocating that individuals provide the only source of economic value.

Value of Money

Does money have a different source of value than other economic goods?

Some people have the mistaken impression that money has a different source of value than other economic goods. This could not be further from the truth, for money consists of just another economic good (or the claim for an economic good.) The only significant difference on this good is that it’s held for the purpose of indirect exchange. It has, however, exactly the same source of value as does any other economic good.

Conclusion

Having a logically consistent source of economic value plays a critically important role in the development of logically consistent economic theory.

The development of reliable theories in any field of study relies on consistent fundamental premises. The same applies to the source of value in the development of any reliable economic theory. The only consistently fundamental premise in the development of theories of value consists of individuals as the source of value.

I shall return to the importance of this fact many times in the course of my blog entries.